PRODUCTIVITY

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The Economic System Transforms Inputs to Outputs

Inputs
Land, Labor, Capital, Management

Process
The economic system transforms inputs to outputs at about an annual 2.5% increase in productivity (capital 38% of 2.5%), labor (10% of 2.5%), management (52% of 2.5%)
Feedback loop
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Outputs
Goods and Services

Measures of Competitiveness
Productivity GDP (Gross domestic product) growth Market capitalization Technological infrastructure Quality of education Efficiency of government
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What is Productivity?
Productivity is a common measure of how well resources are being used or a measure of the effective use of resources usually expressed as the ratio of output to input

Productivity =

Output Input
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Productivity measures are useful for

Tracking an operating units performance over time Judging the performance of an entire industry or country

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Why Productivity Matters

High productivity is linked to higher standards of living
As an economy replaces manufacturing jobs with lower productivity service jobs, it is more difficult to maintain high standards of living

Higher productivity relative to the competition leads to competitive advantage in the marketplace
Pricing and profit effects

For an industry, high relative productivity makes it less likely it will be supplanted by foreign industry
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Typical Impacts of Productivity Improvement

As productivity improved
Parts per man hour

Costs were decreased

Cost per unit decreased
$2.25 $2.00 $1.75 $1.50

Wages increased
Average worker's annual cash compensation increased

115 110 105 100 95 Year A Year B Year C

27000 26000 25000 24000 Year A Year B Year C

Year A

Year B

Year C

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Measures of Productivity
Partial measures
Output Labor Output Output Machine Capital Output Energy

Multifactor Output Output measures Labor + Machine Labor + Capital + Energy Total measure
Goods or Services Produced All inputs used to produce them

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Examples of Partial Productivity Measures

Labor Productivity
Units of output per labor hour Units of output per shift Value-added per labor hour Units of output per machine hour Value-added per machine hour
Units of output per dollar input Dollar value of output per dollar input Units of output per kilowatt-hour Dollar value of output per kilowatt-hour
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Machine Productivity
Capital Productivity Energy Productivity

Typical Measures of Productivity in Different Organizations

Restaurant Customers (meals) per labor hour

Retail store
Chicken farm Utility plant Paper mill

Sales per square foot

Lbs of meat per lb. of feed Kilowatts per ton of coal Tons of paper per cord of 2-10 wood

Example 1
7040 Units Produced Sold for $1.10/unit Cost of labor : $1,000 Which productivity measures can be calculated? What is the multifactor productivity?
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Cost of materials: $520

Cost of overhead: $2000

Solution 1
MFP = Output Labor + Materials + Overhead (7040 units)*($1.10) $1000 + $520 + $2000

MFP =

MFP = 2.20
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Example 2
5,500 Units Produced

Sold for $35/unit

500 labor hours are used Cost of labor: $25/hr Cost of raw material: $5,000 Cost of overhead: 2 x labor cost What is the labor productivity? What is the multifactor productivity? 2-13

Solution 2: Labor Productivity

5,500 units/500 hours = 11 units/hour
Or we can arrive at a unitless figure: (5,500 units*$35/unit)/(500 hours * $25/hr) =15.4

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Solution 2: Multifactor Productivity

MFP = Output Labor + Materials + Overhead (5,500 units)*($35) (500hrs.)*$25/hr. + ($5000) + 2*(500hrs.)*$25/hr.

MFP =

MFP = 4.52
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Example 3
You have just determined that your service employees have used a total of 2400 hours of labor this week to process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms. Which productivity measure should be used? Answer: Could be classified as a Partial Measure. Is productivity increasing or decreasing? Answer: Last weeks productivity = 480/2000 = 0.24, and this weeks productivity is = 560/2400 = 2-16 0.23. So, productivity has decreased slightly.

U.S. Multifactor Productivity

U.S. Multifactor Productivity (1975 - 2007)
MFP (Index, 2000 = 100)
115 110 105 100 95 90 85 80

19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07
2-17 Year

Productivity Growth
Productivi ty Growth = Current productivity - Previous productivity 100 % Previous productivity

Productivity Growth is a key factor in a contrys rate of inflation and the standard of living of its people

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Example 4
Labor productivity on the ABC assembly line was 25 units per hour in 2006. In 2007, labor productivity was 23 units per hour. What was the productivity growth from 2006 to 2007?

23 - 25 Productivity Growth = 100% 8% 25

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MFP Growth - Non-Farm

MFP Growth in the Private Non-Farm Business Sector

Average Annual Percent Change

5 4 3 2 1 0
1948-1973 1973-1990 1990-1995 1995-2000 2000-2007

1,9 1,1 0,4 0,6 1,3

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MFP Growth - Manufacturing

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Measurement Problems
Quality differences may distort productivity measurements External elements may cause an increase or decrease in productivity Precise units of measure may be lacking Technological differences may lead to misleading results.
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Productivity improves when firms:

Become more efficient Downsize Expand Retrench Achieve breakthroughs

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Factors Affecting Productivity (1 of 3)

Standardization Technology Use of Internet, fax machines, e-mail, computerized billing, software Searching for lost or misplaced items Scrap rates Labor turnover, layoffs, new workers Safety 2-24 Bottlenecks

Factors Affecting Productivity (2 of 3)

Methods Design of the workspace Incentive plans that reward productivity Capacity utilization Location Methods Layout Inventory Technology Scheduling
2-25

Quality

Management

Factors Affecting Productivity (3 of 3)

Shortage of IT workers and other technical workers Equipment breakdowns Part and material shortages Inadequate investment in training & education of the employees

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Key Steps for Improving Productivity

Develop productivity measures for all operations Determine critical (bottleneck) operations Develop methods for productivity improvements Establish reasonable goals Get management support (make it clear that management supports and encourages productivity improvements.) Measure and publicize improvements Invest on labor force by training and education (Dont confuse productivity with efficiency) 2-27

Bottleneck Operation
Machine #1 Machine #2
10/hr

10/hr

Bottleneck Operation
10/hr
10/hr
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30/hr

Machine #3

Machine #4

Service Productivity
Typically labor-intensive as in teaching Frequently individually processed (doctors) Often an intellectual task is performed by professionals (medical diagnosis) Often difficult to mechanize or automate (haircut)

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Service Sector Productivity

Service sector productivity is difficult to measure and manage because It involves intellectual activities It has a high degree of variability

A useful measure related to productivity is process yield

2-30

Productivity in the 90s

7 6 5 4 3 2 1 0 -1 -2 -3 |
US

Germany Japan

90

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